Shock as triple dose of pain triggers growth downgrade

Back to the drawing board: government statisticians revised down estimates of growth in the last quarter of 2010

A triple-whammy of slumping business spending, a consumer squeeze and a dire trade performance hit the UK as the economy took an even bigger dive than first feared in the final quarter of 2010.

The Office for National Statistics' second stab at GDP revealed a steeper 0.6% decline than its original 0.5% estimate a month ago, a shock figure which could halt the growing momentum for interest rate rises on the Bank of England's monetary policy committee.

The ONS stuck by its original estimate that December's snow chaos knocked 0.5% off growth, but this still left the underlying economy in decline as doubts grow over the country's fragile recovery. Sterling fell nearly a cent against the dollar to $1.6098.

The more-detailed figures published today revealed a 2.5% slide in business investment, the biggest decline since the second quarter of 2009, and the first fall in household spending for more than a year.

Trade also knocked 0.3% percentage points off growth as imports outstripped exports and dealt a blow to hopes of rebalancing the economy, while Government spending was the only sector to contribute positively to GDP.

Charles Davis, managing economist with the Centre for Economics and Business Research, said business investment was still running almost 20% below pre-recession levels as nervy companies sit on cash.

"Some of this will definitely be down to the snow, as many capital investment projects may have been shelved. But the fact is that business investment is still weak and consumers are still under real pressure going into 2011," he said.

The UK's powerhouse services firms, which account for almost three-quarters of the economy, saw an even steeper 0.7% fall, driven by a weaker performance from business and financial services. Manufacturers have so far been the leading lights in the UK's efforts to pull away from recession, but their 1.4% fourth-quarter growth was also scaled back to 1.1%. The figures underline the dilemma faced by Bank rate-setters wrestling with fresh evidence of a weak recovery as well as inflation running at double the 2% target and set to rise further in the months ahead.

Industry surveys have shown recovery signs since the beginning of the year, but consumer confidence is languishing at its lowest levels since the depths of the recession and rocketing oil prices will add to the pressure on household budgets even before the impact of deficit-busting spending cuts is felt.

With five MPC members voting to hold rates at 0.5% the first estimate of GDP for the first three months of 2011 due at the end of April looks pivotal.

Daiwa Capital Markets Europe economist Hetal Mehta said: "How strong a bounceback we see in Q1 will be crucial."